Fed’s choice of 75 or 100 leaves traders guessing as decision approaches

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(Bloomberg) — Federal Reserve officials could find reasons to raise rates by a full percentage point next week if they decide to look hard enough, though the base case still looks like 75 basis points.

While most economists see the smaller — but still aggressive — surge as the most likely outcome of the central bank’s Sept. 20-21 meeting, a blockbuster move isn’t zero risk in the wake of a hot reading of core consumer inflation in the US. august . Investors attribute about a 24% chance that it could happen, according to interest rate futures pricing, and some Fed watchers believe the chance is higher.

“One percent must be on the table. They’ll probably stay at 75, but it’s going to be a close call because you have to think about where they start,” said Diane Swonk, chief economist at KPMG LLP.

After two consecutive 75 basis point hikes in June and July, the Fed has already hiked rates by 225 basis points since it began raising rates in March.

Next week’s hike — and chairman Jerome Powell’s policymakers have made it clear they intend to continue — will raise the highest level of their benchmark target rate to 3.25% or 3.5%, assuming they go with 75 percent increase. or 100 basis points. That would put rates in an area where the policy will limit price pressures.

“They know they need to tighten to derail inflation and haven’t started that yet,” Swonk said. “They’re catching up.”

Increasing the magnitude of the tightening at this month’s meeting would send a strong signal to markets, which have occasionally frustrated officials in recent months. Markets rebounded after the Fed’s July meeting and viewed Powell’s comments in the next press conference as moderate, even though he explicitly left the door open for an “even bigger” rate hike if needed.

And the persistent persistence of inflation, plus strength in other parts of the economy, including the labor market, some believe is bolstering the case for an even more aggressive Fed. Nomura Securities, which is forecasting 100 basis points gains next week, said the upside risks to inflation in the August report will prompt officials to ramp it up.

Other economists say that while an excessive move is not impossible, continued high inflation will cause the Fed to continue raising rates for longer, pushing the final rate of this tightening cycle to a higher peak. But it won’t rush to get it done, despite the higher-than-expected rise in the consumer price index in August.

“Even if CPI doesn’t change the basic approach of the FOMC, it’s still an important step change, one that advocates a little more front-loading and possibly a slightly higher terminal velocity than usual,” Laurence Meyer, a former Fed governor, wrote in a note earlier this week.

The median estimate by Federal Open Market Committee participants in June, when the central bank last released its forecast, was that interest rates would peak around 3.8% next year. That’s likely to move up in projections updated on Sept. 21, with some seeing it shift as much as 5%.

“There is little doubt that inflation data will prompt the Fed to be more aggressive in its upcoming meetings,” said Roberto Perli, head of global policy research at Piper Sandler & Co., wrote in a note. “As inflation appears to be more persistent than expected and given that most of the FOMC likely agrees with the market that a higher peak rate is needed, it is not clear that reaching slower and more gradually is preferable to reaching faster. . .”

While a bigger hike this month would help policymakers reach their final rate faster, some economists worry it could lead markets to expect rate cuts faster than policymakers plan.

“Pushing back against expectations of an easing next year is not just a matter of aligning the forecasts, but rather exerting more leverage over longer-term interest rates: essentially the opposite of the low-for-long strategy that many market participants have followed,” Michael Feroli, chief US economist at JPMorgan Chase & Co (NYSE:), wrote in a note. “In this regard, a 100 basis point move next week could only encourage those who see easing next year after accelerating Fed hikes in late ’22.”

©2022 Bloomberg LP



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